What happens to employees when their employer becomes insolvent?

The last people who may become aware of the closure of a company are quite often the employees, the very people who have been tirelessly working to keep things moving.Employees, often living hand to mouth, suddenly have no income.  This can have far reaching consequences and can obviously be a hugely worrying and stressful time for them.Employees do however have statutory rights and may claim from the National Insurance Fund via the Insolvency Service. Statutory rights may differ from their contractual rights.Employees are entitled to claim for arrears of pay, accrued holiday entitlement, redundancy and compensation for not receiving proper statutory notice.  These are all paid according to the statutory limit which is currently £464 per week.A claim can be made by each employee and the Insolvency Practitioner will send out forms RP1 for completion and return.Employees may claim for:

  • salary/wages owed up to eight weeks.
  • accrued holiday entitlement, up to a maximum of 6 weeks.
  • Compensation for Lieu of Notice up to a maximum 12 weeks.  Those with between 1 and 24 months of service receive one week.Those with between 2 and 12 years service receive one week for each completed year. The employee has a duty to mitigate this claim by claiming whatever benefits they may be entitled to.
  • Redundancy. Check the DirectGov website (click to link to the calculator/ redundancy recknoner). The length of time paid is dependent upon age:
    For those over 41 years receive 1.5 weeks of pay for each completed year of service
    For those between 22 and 40 receive one week’s pay for each completed year of service
    For those up to 21 years receive half a week’s pay for each completed year of service
This is the entitlement from the Insolvency Service through the National Insurance Fund. Once payment has been made to the employees, the Insolvency Service becomes a creditor of the insolvent company in a bid to reclaim monies paid from the National Insurance Fund.Employees can claim from the insolvency practitioner for the difference between payments made by the Insolvency Service and their employment contract. This relates to all aspects such as salary, holiday entitlement, redundancy entitlement where it is different to the statutory entitlements. Their claim may not be paid in full or indeed at all – this will depend upon the value of assets owned by the company and what realisations have been made by the insolvency practitioner.Employees are treated as preferential creditors (in respect of arrears of pay up to £800 and all accrued holiday). The Insolvency Service has rights of subrogation if they have made payment to the employee.TUPE Regulations will apply if the business is transferred to a new owner – we shall provide further information on this at a later date